By assigning fishing quotas to individual fisherman, Iceland has solved the problem of over-exploitation typically associated with open access to common-pool resources.

Iceland was once blessed with the bounty of marine products in its 200-mile wide Exclusive Economic Zone. Even so, it was not exempt from over-fishing by any means. Its rich herring stock collapsed in the late 1960s. In 1981-83, the total catch of its most valuable cod dropped from 462,000 metric tons to 294,000 metric tons. Due to over-investment as a result of open access, returns on fishing capital in 1983 were only one quarter as high as they were in 1945.

Iceland thus experienced a classic case of the tragedy of the commons in which open access to a common-pool resource with limited replenishment capacity leads to system collapse. Open access ensures that each additional unit of fishing capital earns the average return. So as long as the average returns are positive, entry of new capital will continue even though the marginal returns might be negative. But negative marginal returns imply that the total harvest exceeds the natural replenishment rate of the fishing stock. If this level of overexploitation continues, the fishing stock will collapse.

Economic theory would suggest that assigning property rights is a feasible solution in the case of open-access resources. This way the negative externality1 associated with open access can be avoided, as the property owners must be compensated for infringement of their rights. Also, the property owner would be interested in the long-term maximization of the value of their property rights. They would, thus, be conservationists. But how do we assign property rights in the open sea?

In the early 80s Iceland came up with a solution, which they called Individual Transferable Quotas or ITQs. Each year The Ministry of Fisheries set a Total Allowable Catch, (or generally use quotas) thereby controlling over-fishing. This was then divided among the fishermen on the basis of their share of the catch in the previous three years. And mind you, these quotas were distributed for free and not auctioned off. Had they been auctioned off, the successful bidders would have had to pay the government for something they previously exploited for free, and the unsuccessful bidders would have lost all their investment by being forced out of business. So only the government would have been better off!

Even though the quotas were given out for free, the imposition of an overall catch limit essentially is a disguised tax on catches.

First of all, these quotas made fishing rights exclusive and permanent to ensure that the fishermen had a vested long-term interest in the value of their property. Secondly, by making these quotas transferable, they enabled vessel owners to buy others out. So inefficient quota-owners had an incentive to dispose of their quotas, boats, and gear to more efficient producers. Further, some large fishing companies (previously family-owned), in order to raise funds to buy out quotas, now became public companies. And as public companies they now had thousands of shareholders. So it can be argued that the ITQs were now in the hands of more people than before. So everyone was better off - from the fish in the water to the general public!

Note:

Uncompensated cost imposed on innocent third parties due to unassigned or poorly assigned property rights or when the cost exceeds the benefit of exercising properly assigned rights.

Uncompensated cost imposed on innocent third parties due to unassigned or poorly assigned property rights or when the cost exceeds the benefit of exercising properly assigned rights.